January 22, 2010
Summer is coming and perhaps you are ready to mix your winter-weary business travel with some pleasure for the summer. To keep things simple and in tax compliance with IRS tax reporting, here are some tips on what is tax deductible and what is not.
The IRS allows ordinary and necessary travel expenses related to business. This means your business expenses should take a direct route to the primary purpose of your business trip. Overnight accommodations should be at a comfortable place such as a hotel or conference retreat. Accommodations shouldn’t be extravagant in luxury. Under the accountable plan, there is no tax reporting on actual receipts. The non-accountable plan, however, is reportable on Form W-2 for employees getting travel reimbursement in excess of actual receipts such as per diem or advance payments without using all of the funds.
If a traveling business owner or associate flies on a commercial jet to an industry conference in Los Angeles, stays at decent hotel, rents a premium car and dines with his potential customers, then this may be an appropriate business tax deduction. Likewise using a limousine in Manhattan where transportation fares are reasonable and appropriate in this area may be acceptable. However, it’s not a reasonable tax deductible for a local small business owner to fly on a private jet and a book a large beach house for his family vacation while the owner has a brief business lunch in Miami, Florida.
If you are planning to mix your travel plans as business and pleasure, you will need to separate your personal expenses. Suppose George bring his family from Houston, Texas to Orlando, Florida for his jewelry trade show all day Thursday and Friday. George’s wife, Emily, and their two children stay at his double bed hotel and they go to Disneyworld over the next three days while George works. They return home on Sunday night by commercial flight. Table 1 allocates George’s business and personal expenses.
| Table 1: Expenses | Allowable Business Expense | Non-deductible Personal Expense |
| Four round trip airfares at $1,200 | 300.00 | 900.00 |
| Double-bed hotel room at $150 a night | 300.00 | 300.00 |
| Car rental $500 | 300.00 | 200.00 |
| Two luggage check-ins at the airport | 25.00 | 25.00 |
| Disneyworld | 600.00 | |
| Meals & incidental expenses (M&IE)* assume $49 per person each day | 98.00 | 686.00 |
| Total expenses: | 1,023.00 | 2,711.00 |
| *incidental expenses are taxis, shuttles, tips, fees, etc | ||
Because Emily and children are traveling for vacation, that is a personal expense.
Now if you decide to be a road warrior from Anchorage, Alaska to Key West, Florida, then it may be as simple as hopping in the car and being on the road collecting your gasoline and motel receipts. When driving from home to a temporary place of work or a business conference, you have two methods to calculate your auto expense.
- Mileage x IRS standard mileage rate (.585 as of January 1, 2022), or
- Actual expense such as depreciation, lease payments, insurance, gasoline, oil change, auto license, inspection fees, repairs, tire replacement, etc
You will want to use the method that gives you the maximum tax deduction. But if you choose the mileage method, you must use this method in the first year of your auto for business. Then you may change this to actual expense in the second year and after.
For the mileage method, you can keep a log of your date of travel, purpose, beginning and ending miles or miles driven on a notebook, daily planner, calendar, Excel spreadsheet, or similar method. Choose a tracking method that is comfortable for you so you won’t get frustrated or overwhelmed with complexity and then procrastinate.
For meals and incidental expenses (M&IE), the self-employed can use the IRS standard meal allowance instead of calculating the actual receipts. For employees, we recommend using the actual receipt under the accountable plan. IRS Publication 1452 has a list of city per diem rates for a given time frame. Meals are subject to a 50 percent limit when dining with customers. The daily rate may also be prorated to ½ or ¾ day rate for traveling days.
Even if you use the standard mileage and standard meal allowance deduction method, you will still need to collect receipts or card statements as proof of business travel. If you don’t have anything to prove your time, place, and business purpose of your travel, then the IRS will disallow your tax deduction.
To make all this easier during your business travel, have a designated envelope to store your receipts. Make a note on the purpose of your receipt. The travel envelope also comes in handy to note the amount and time when a receipt is not available such as tipping the bellman or when your taxi driver ran out of receipts.
When you get home, you can slip the travel envelope in your tax reporting box and catch up on work. Then designate a time to enter your travel expenses in the accounting books or give it to your CPA for your year-end financial and tax reports.
Howard Knight is a freelance CPA. To comment on this article, he can be reached at hk@howardknight.com.
CIRCULAR 230 DISCLOSURE: Any federal tax advice contained in this communication, including attachments and/or links, is not intended or written to be used, and cannot be used, by anyone for the purpose of avoiding federal tax penalties that may be imposed by Internal Revenue Code or applicable state or local tax law provisions or for promoting, marketing or recommending to another party any tax-related matters addressed herein.